Readers, this is my last column. I wanted to thank my readers and the team at Reuters for a truly great ride. I’ve been covering municipal securities, market structure, pensions and bankruptcy for over three years. There have been a lot of big changes in America as the country seeks to recover from the global financial crisis. The crisis affected state and local governments by slowing revenues and investment in infrastructure. I don’t see this changing in the near term.

Our country is still wealthy according to global standards. We have the resources to make an equitable economy and protect the most vulnerable. But reform is necessary through all levels of government. As citizens and taxpayers, we all should demand this.

I’ve written about seven municipal bankruptcies. The biggest and most complex is beginning now in Puerto Rico. In March 2012 I first wrote that the Puerto Rico government would have solvency issues. Now this has come to pass. I wrote 76 columns about Puerto Rico, 74 of which were negative. The last two I wrote were somewhat positive because the government is beginning to take the hard steps of rationalizing its debt structure, reform spending and reduce the level of government employment. Puerto Rico is beginning a vital transformation process.

Puerto Rico has over $85 billion of debt outstanding. I’ve launched a research service for bondholders, Puerto Rico Clearinghouse, with attorney John Mudd to track the legal and legislative battles that will take place to restructure this debt.

Thanks to everyone for this great experience. The finances and borrowings of our government are critical matters. It’s been an honor to have this space to comment on them.

Five months after Puerto Rico officials talked publicly to market participants, they held an investor call on Thursday with over 2,000 people. The call was captured by Storify. Puerto Rico’s previous call in February rallied market enthusiasm for a $3.5 billion general obligation bond offering that was priced on March 8. The March deal, the largest speculative grade bond deal ever done in muniland, replenished the coffers of the fiscally debilitated island.

Now the government is hoarding that cash and taking “swift and decisive” actions to clean up its internal capital structure. It is paying back internal loans between the central government, the Government Development Bank (GDB) and public corporations. Officials said that they had eliminated virtually all interest rate swap contracts at the GDB. They outlined new revenue sources and detailed expense reductions for general government operations.

The government reiterated that it intends to “ring fence” the debts of several public corporations while protecting their constitutionally-guaranteed general obligation debt and sales tax-backed Cofina bonds. An investor group that owns about $3 billion in Puerto Rico general obligation and Cofina debt announced that it supports the government and stands ready to assist Puerto Rico with financing.

At the opening of the call, Governor Alejandro García-Padilla said “our commitment to honoring financial responsibilities of Commonwealth remains unshaken.” Officials seemed confident and committed to imposing austerity on the government’s expenses.

“We believe that rating agencies have seriously misunderstood and misrepresented the intentions of the government,” said David Chafey, president of the Board of Directors of the GDB. Chafey stated that the government had a sufficient “liquidity runway” to sustain its capital needs, but had expected to access the market again in the short term. Chafey said that the GDB is “dedicated to working on a consensual agreement with our creditors.”

The government’s debt strategy is two-fold. First is to negotiate a reduction in debt, believed to be $8.3 billion of the electric monopoly Prepa’s, and to find new lenders for its short term borrowing needs.

Officials said that they planned to borrow $900 million in the next three months using tax anticipation notes (TANs). The water monopoly, PRASA, needs to refinance $200 million in bond anticipation notes before March 2015. Officials said that they would not refinance any general obligation or sales tax-backed Cofina debt, but they could do additional borrowing via the Cofina structure if market conditions permitted.

For the first time since 2009, Puerto Rico will pay its full general fund debt service of $1.2 billion without refinancing it with new debt. This would be a substantial milestone for the government.

The government’s funding vehicle, the GDB, has significantly strengthened its balance sheet. GDB’s investment portfolio increased from $1.5 billion to $3.2 billion, the total loan portfolio was reduced by 11.3 percent (from $9.8 billion to $8.8 billion) and GDB deposits increased $650 million over the last six months.

Puerto Rico said that they will vigorously defend Act 71, its new public corporation restructuring law. The market suspects that Act 71 will first be applied to Prepa, the electric monopoly. The government said that it intends to treat all creditors equitably. Oppenheimer Funds and Franklin Templeton sued the Commonwealth last month, asking a federal judge in U.S. District Court in Puerto Rico to strike down the law. Puerto Rico said it will formally respond to the lawsuit in the “next few days.”

Officials beat down two market rumors. The GDB’s Chafey denied that the electric monopoly Prepa had used funds from its capital reserves to buy fuel as reported in the press. Chafey said that the public corporation had permission to use these reserves, but did not. Officials also stressed that Prepa was not in default of bond covenants. No rating agency has said that Prepa is in default.

Governor García-Padilla announced that the government will submit a plan for comprehensive tax reform during the first half of the fiscal year.

Puerto Rico is quietly undergoing a forced austerity. The government detailed actions that include a new budget, which began July 1, that seeks to eliminate the general fund deficit one year ahead of schedule. This will be Puerto Rico’s first balanced budget in 22 years. The Fiscal Sustainability Act (66-2014) declares a state of emergency and gives the government more flexibility to get to budgetary balance and phase out financing of budget deficits. Act 66 remains in place until July 1, 2017, or when certain economic and fiscal conditions are met, including an upgrade to investment grade by one major rater.

The government’s agenda is ambitious:

Some reactions to the Puerto Rico investor call from Nuveen’s Shawn O’Leary and Dr. Arturo C. Porzecanski of American University:

A lot of people in muniland have asked me how much the bonds of Puerto Rico’s electric monopoly Prepa will recover if they are restructured. I’ve thrown out a few numbers, but I don’t have an analytical tool to do a proper cash flow analysis. Chris Foster, managing director of New Oak, has published an open source model (download middle right of page – XLSM file) that allows one to adjust various inputs like fuel prices and electric rates to estimate the level of debt service that Prepa can support.

New Oak put most of Prepa’s historical financial data into the spreadsheet and creates scenarios that can be adjusted to estimate how much bondholders will have to be cut.

Foster explained that his firm, a subadvisor to funds and financial institutions, was hearing a lot of uninformed theories about Prepa. He thought modeling the potential outcomes would be helpful. His firm and their clients do not own Prepa bonds. Foster said that it was time for everyone involved “to look at the math.”

Foster says statements like Puerto Rico Governor Alejandro García Padilla’s that he wanted to sue raters were made to give local residents a target for their anger, but bondholders should ignore the rhetoric. He welcomes feedback from market participants about his open source model. Foster also told me that municipal analysts should start doing more fundamental credit analysis like distressed debt analysts.

I talked to Shawn O’Leary, Nuveen Asset Management senior vice president, about Foster’s model. He believes the concept is a great idea, but O’Leary doesn’t think that a Prepa restructuring would be about cash flows. Instead, it would be about protecting the liquidity of the Government Development Bank (GDB), which has been operating as the government cash slush for years.

The Puerto Rico government’s communications have been opaque. It did not hold its annual bondholder conference this year (instead the government held a conference headlined by John Paulson advocating tax breaks for rich U.S. investors to move to the island). O’Leary told me that his calls have not been returned as much by the GDB since the government hired the restructuring firm Cleary Gottlieb.

The government’s investor call on Thursday is the last gasp of the government trying to woo back investors who sold their bonds after the public corporation restructuring law was passed.

According to O’Leary, there is only a limited chance that Prepa will not file for reorganization. Perhaps Cleary Gottlieb partner Lee Buchheit preferred that Prepa’s bonds be sold off so they would fall in the hands of hedge funds and others at a very low price (many of Prepa’s bonds touched a low of 40 cents on the dollar). If hedge funds and others owned Prepa bonds at 40 cents, they would be willing to take a lower recovery value during restructuring talks.

Municipal news service Debtwire is reporting that a group of hedge funds has “begun to coalesce around their own legal experts and have hired Morrison & Foerster.” Let the legal games begin.

Why is it so expensive to trade municipal bonds? We finally have some answers from a long awaited MSRB report on trading in the opaque muni bond market. The study was conducted by former SEC Director of Enforcement Erik Sirri. It maps where bonds go before they settle into retail customer accounts. Every time the bonds change hands, the price is marked higher. In the dark muni market, nobody sees this happening.

Sirri’s study analyzed 43 million trades between 2003 and 2010. Over 73 percent of the muni trades were for less than $50,000.

A trade begins when a dealer buys bonds from a retail customer, and then either sells those to another retail customer or trades them to a dealer (who then sells them to a customer). This “inter-dealer” trading can happen 2-10 times before a bond lands in a customer account. The report refers to these as “chains” of trades. You can see how the bonds are marked up between the chains here:

These trades often happen within the time frame of one day:

In fact, almost half of the trades happen within one minute:

Small trades cost more than big trades. As the bonds go through a number of dealers, the price goes up. This chart expresses the cost differential in basis points (a basis point is a 100th of a percent, so 200 bp = 2 percent):

The cost of doing a trade goes up until the bonds are about 10 days old, and then decline in price. The bonds have become stale inventory:

In a new report, Janney Capital Markets analyst Tom Kozlik calls out Standard & Poor’s for credit ratings on local governments that he says are too liberal. Kozlik claims that S&P is inflating ratings. I think his analysis is solid, but inconclusive given the size of his claim. Kozlik opens the door to more critical analysis of the comparability of ratings.

The Bond Buyer wrote:

Since S&P updated its criteria, it is more common for issuers to have ratings from S&P that are multiple notches higher than their ratings from Moody’s. ‘This leads us to believe that ratings shopping will continue, perhaps at an even faster pace than before,’ Kozlik wrote.

Ratings are opinions. There is nothing in federal law or the SEC rules that says one rater must be as conservative as another. Credit rating firms are free to analyze bond issuers however they want, as long as they disclose the methodology. Kozlik seems to believe, like most of the market, that raters should assign alphanumeric ratings in a standardized way to signal risk on an equal scale.

Issuers obviously want the highest rating possible so they can borrow money at the lowest cost. Investors want the opposite — for issuers to get critical ratings so they can get paid higher interest rates. Issuers often “shop” their ratings to find the best one.

There are ten raters that are officially “recognized” by the SEC to assign ratings. Four of these firms assign ratings for muniland (Fitch, Kroll, Moody’s and S&P).

He plots data showing that S&P has higher upgrade-to-downgrade ratios than Moody’s.

He details an instance where the two raters diverged in their assessment of a specific issuer in which S&P left out important information.

He alleges that issuers hide their lowest ratings and don’t include them in official statements and other investor communications.

If Kozlik is right, has S&P broken any rules? No, because credit ratings, according to law, are merely “opinions” that raters assign to bond issuers.

Kozlik’s analysis focuses on S&P’s methodology for U.S local government general obligation (GO) bonds, which it revised in 2013.

Kozlik admits that S&P said upfront that its revised local GO criteria would improve its muni ratings. S&P’s upgrades are happening at a time when local governments are under increasing fiscal stress and ratings should be going down instead of up.

It is up to market watchers to do more analysis and use transparency to highlight where the raters are diverging from each other. Raters are required to publish complete sets of historical rating data in machine readable form that allow researchers or market participants to mash up ratings between firms and with trade data. Analyzing this data is the best way to look at systemic rating issues.

Kozlik’s work is laudable for shining a light on rater performance. But I think it also highlights that ratings are not scientific and that raters are free to define how they look at issuers. This only demands more analysis.

In the end, investors have to determine how useful ratings are for themselves. As David Litvack, Managing Director at U.S. Trust, Bank of America Private Wealth Management wrote to me about credit ratings: “We have always believed independent research is essential for investing in any fixed-income security.”